Tax Liabilities for Equity Transfer in China: An Introduction

In terms of business practices, equity transfer is one of the most common. And whether you are an individual or corporate shareholder, you will be liable to pay various taxes during the whole process. But for these two different types of shareholders, there are different tax rates and specific tax implications that you need to consider. We are going to break down the tax liabilities and duties of both corporate shareholders and individual shareholders when they need to transfer equity in China.

Understanding Equity Transfer

Before we go any further, it makes sense to understand what equity transfer is. Equity transfer is when a shareholder transfers equity to another person or individual or even a legal person. This usually takes place under the following circumstances.

• When you are disposing of equity.
• Company equity buybacks.
• When a person makes an initial public offering (IPO) that includes shares and the shareholder wants to sell theirs to other investors as part of the IPO.
• When judicial or administrative transactions are used for mandatory equity transfer.
• When equity is used for external investment or other non-monetary-related transactions.
• When equity is used to offset debts.
• Other acts of equity transfer.

We need to point out that this guide is for the purpose of discussing shares or equity in enterprises or other organizations that the person in question invests in, but that doesn’t include any partnerships or sole proprieties.

It’s even more important to understand equity transfer in China because there are so many local and relevant tax rules and regulations you need to decipher.

A good example would be Article 16 of the “Implementation Regulations for the Corporate Income Tax Law of the People’s Republic of China (CIT Implementation Regulation)”. This article states the phrase “income tax from the transfer of property” and it’s also mentioned in Article 6 of the Corporate Income Tax Law of the People’s Republic of China in regards to any income that is made by an enterprise when using any transfer of biological assets, intangible assets, fixed assets, creditor’s rights, equity and more.

Stipulations in the Implementation Regulations for the Individual Income Tax Law of the People’s Republic of China, which is known as the IIT Implementation Regulation, states that any income that is part of a property transfer will be listed as income made by the individuals who are involved in the share of properties of the partnership enterprise, the priced securities, equity, machinery and equipment, vessels and vehicles and any other related properties.

The tax rules are in place on the transfers of the property and will apply to the overall equity transfer unless it is otherwise stated.

Equity Transfer Tax Liabilities of Individual Shareholders

When it comes to individual shareholders that are undergoing equity transfers, they are liable for stamp tax and IIT.

IIT Implementation Regulation

When trying to understand the IIT Implementation Regulation issues, any income that is derived from the property transfer (equity and other things) in China that is seen as income sourced in China, will be subject to all manner of IIT regulations. And that doesn’t matter whether the payments were made or even took place on Chinese soil or not.

To understand these issues, you need to refer to the Announcement of the State Administration of Taxation on Promulgation of the Administrative Measures on Individual Income on Income Derived from Equity Transfer (trial implementation). Under this stipulation, if equity is transferred by an individual taxpayer, the taxable part of this equity will be the total balance which is a deduction of the original value of the equity and any acceptable expenses that have been incurred during the transfer process. In this scenario, the IIT is paid by the individual as “income from transfer of property”.

The amount of income that is included in the tax rate is 20% of the entire transfer of the property. The term ‘reasonable expenses’ is the relevant taxes and any fees paid for the equity transfer pursuant to the provisions.

You can get in-depth guidance on how to determine the taxable part of the income, calculate the reasonable expenses and find out the original value of the equity by reading the Announcement of the State Taxation Administration on Promulgation of the Administrative Measures on Individual Income Tax on Income Derived from Equity Transfer, which is a trial implementation.

The taxpayer is the person who is making the transfer. The withholding agent is the one who is receiving the transfer during this process. The relevant equity transfer information needs to be reported to the tax authorities within five days or under from the signing date of the equity transfer agreement or contract by the withholding agent.

A detailed record of any shareholder, also called the holder of equity, costs are required by the enterprise that is issuing the shares. Accurate and truthful information on the equity transfer that is given to the tax authorities is also required to help and assist the authorities so they can enforce official duties pursuant to the law.

Stamp Tax Regulations

Equity transfer stamp tax rates are 0.05% based on the property transfer document amounts. When the amount is not specified on the property transfer document, the base of the stamp rate is calculated by using the amount in the actual settlement. The settlement amount when it cannot be determined in accordance with the stamp tax rate will be determined by the market price at the same time when the property transfer document was concluded.

If this scenario arises, the government-guided price or the government-fixed price should be used in line with the current laws, while the relevant provisions of the state will determine the stamp tax rate.

An individual shareholder could be eligible for some preferential tax policies in regard to paying stamp tax, which could be very beneficial.

From 2019, any small-scale value-added taxpayer can benefit from some VAT fee reductions up to 50% of the taxable amount, which is better known as “six taxes and two fees” as the stamp tax sits in this bracket.

In accordance with the MOF STA Announcement (2022) No.10, small-scale taxpayers, small to low-profit enterprises (SLPEs) and self-employed individuals can receive this policy and its benefits. The date of extension to receive this policy has recently been extended to 31 December 2024 from its original 31 December 2021 date.

Those who fall into the self-employed individuals, small-scale taxpayers, and SLPEs bracket can enjoy the same 50% stamp taxation reduction between 1 January 2019 and 31 December 2024.

VAT Regulations

To understand the VAT ramifications, you need to refer to the Notice of the Ministry of Finance and the State Administration of Taxation’s Full Launch of the Pilot Scheme on Levying Value- Added Tax in Place of Business Tax (Caishui [2016] No. 36). This states that individual shareholders partaking in the equity transfer of unlisted enterprises do not have to pay VAT and the transfers of equity that are individual shareholder’s listed companies are also not subject to VAT.

Equity Transfer for Corporate Shareholders

Corporate shareholder tax liability during an equity transfer is different for both non-resident enterprises and resident enterprises. Here is a list of the taxes involved where corporate shareholders are concerned:

• CIT.
• Stamp Tax.
• VAT (when and where applicable).
• Land appreciation tax (when and where applicable).

CIT

Residents and non-residents are taxed very differently when you read the CIT Implementation Regulation and CIT Law in the table below:

Taxable Equity Transfer Income = Equity Transfer Income – Equity Net Value

The definition of equity transfer in this instance means the consideration that is collected by the transferor of equity making the transfer from the equity transfer. A variety of non- monetary and monetary incomes are included.

The net value of the equity is essentially the costs of the capital contribution that is paid by the transferor that is transferred to a Chinese enterprise resident when the equity and investment participation is taking place. But it’s the equity transfer costs that are paid during the time of the acquisition of equity directly from the person or the company or entity that transfers the equity.

When an appreciation of a reduction of value is involved during the period of equity holding, any losses or gains that are in line with the finance and tax authorities of the State Council provisions will be adjusted in regards to equity net value.

If the enterprise calculates the equity transfer income, they must not deduct any amounts that could be distributed to the equity transferred from the retained earnings of the shareholders such as any profits that went undistributed or earnings from the enterprise that is issuing the equity.

When a partial transfer takes place where the equity of a multitude of investments or acquisitions is concerned, it’s the job of the enterprise to state the corresponding costs in the equity transferred and to ensure it’s in accordance with the equity transfer ratios.

When an equity transfer is operating under a normal tax treatment, for resident taxpayers in China and corporate shareholders, the income in the equity transfer must be aggregated into annual profits that must adhere to the company’s applicable tax rate to the CIT. The CIT rate at the current time of writing in China is 25%. Depending on the entity size, sectors, type, and locations, there are reduced CIT rates available.

In regard to non-resident corporate shareholders that are taxpayers in China, the equity transfer income will enjoy a tax rate reduced by 10% that is subject to the CIT.

When discussing the normal tax treatments, you need to refer to Caishui (2009) No.59, State Administration of Taxation Announcement (2013) No.72, and Caishui (2014) No.109, which details that special tax treatments can be applied for during equity transfers by following these below conditions:

• If you do have commercial objectives that are reasonable, the reduction, postponement, or exemption of paying tax is not the main objective.
• Complying with the requirement ratios for merged, divided, or acquired assets or equity. A good example would be when during the equity acquisition when the acquirer purchases equity that is not less than 50% of the entire equity of the one who acquires.
• When the original substantive business activities that are restructured assets are not altered or changed during a period of 12 consecutive months after the enterprise has been restructured.
• The equity of the payment amount during the consideration period of the restructuring transaction needs to comply with the ratios that are required. An example would be when during the equity acquisition that the payment for the equity amount that the acquirer has incurred should not be less than 85% of the total payout of the transaction amount.
• When equity is obtained by the original shareholders when the enterprise is being restructured, the equity gained in the previous 12 consecutive months shall not be transferred after restructuring has taken place.

Extra requirements for equity acquisition transactions that take place between an overseas party and a domestic party that include Taiwan, Hong Kong, and Macao territories can enjoy special tax treatment that includes the following details:

• Any transfers of resident enterprise equity that happen to be held by non-resident enterprises to other non-resident enterprises where 100% of the controlling shares are owned by them that don’t cause changes in withholding tax burdens on any income from a transfer of this type of equity where the non-resident equity transferor has proved in written word to the relevant tax authorities that it won’t transfer the transferee’s equity of the said non-resident enterprise that it has owned within the past three years.
• The equity transfers by any non-resident enterprise of certain equity that is from another resident enterprise that is owned by the said non-resident equity to another resident enterprise that 100% holds the controlling shares.
• A resident enterprise investment that has equity or assets that it owns that belongs in a non-resident enterprise where it directly holds 100% of the controlling shares.
• Certain circumstances that the Ministry of Finance and State Taxation Administration have already approved.

Special tax treatments for non-resident enterprises can be chosen for equity transfer, but they are required to create and record tax flings directly to the tax authorities and bureau within 30 days after the equity transfer agreements or contract comes into effect and all formalities regarding registration for market regulation have already been completed.

The tax base can be calculated differently if special tax treatments for the equity transfer in an early acquisition by following the below points:

• The acquirer’s equity that has been obtained by the shareholders of the acquiree is used as the tax base and is largely determined by the acquired equity’s original tax base.
• The original assets and liabilities of the acquiree and the acquirer is used as the tax base although there are other income tax matters that are unchanged.

There is a scenario where the tax payment might be different. A good example of this is during debt restructuring processes that are largely paid by the equity, and that part could be included in the taxable income amount that is then included on an average over the course of five tax years in the taxable amount.

For Stamp Tax

The corporate shareholders that are part of the equity transfer have stamp tax levied on them, which is exactly the same for individual shareholders.

For VAT (when and where applicable)

In the event of an equity transfer that includes financial commodities transferals, it is standard that general taxpayers need to pay around 6% in VAT. However, it’s more common that small- scale VAT taxpayers to pay around 3% of the levy rate for VAT. Only on transactions of this type can small-scale and general taxpayers alike issue this type of VAT invoice.

For Land Appreciation Taxes (when and where applicable)

Last but not least, when equity transfer is part of the land-to-use rights, and for above-ground buildings and attachments, land appreciation tax will also be part of the transfer. Land appreciation tax calculations use the appreciation amount obtained by the taxpayer as the base. This could be from real estate where the proceeds of the deal obtained by the taxpayer as part of the deal once the deductible item sums have been deducted and then levied in conjunction with progressive four-step tax rates that range from 30% to 60%.